I am the director of the Tax Policy Center (TPC), Paul Volcker Professor of Public Administration and International Affairs at the Maxwell School of Syracuse University, and a research associate at the National Bureau of Economic Research and the Center for Policy Research. My research focuses on federal tax and budget policy. In 2002, I co-founded the TPC. I served several stints in government, including as Deputy Assistant Secretary for Tax Analysis at the US Treasury and Senior Analyst at the Congressional Budget Office. I was president of the National Tax Association from 2010-2011. I have a Ph.D. in economics from the University of Minnesota and a B.A. from Wesleyan University. I have four adult kids and am married to my college sweetheart, Missie Burman. I'm an avid bicyclist and sing baritone in the Syracuse Oratorio Society. I also like to cook.

The author is a Forbes contributor. The opinions expressed are those of the writer.

Is Buffett Rule a First Step Towards Tax Reform?

When the president first announced his Buffett Rule–that millionaires should pay at least 30 percent of their income in tax–in the State of the Union address in January, I had a strong sense of déjà vu. It is another alternative minimum tax, and its provenance is very similar. Congress created a minimum tax back in 1969 when people were up in arms about 155 high-income people who hadn’t paid tax a few years earlier. The logical response would have been to close the loopholes that let rich people avoid tax, but that would have been politically costly, so instead we got the thing that evolved into the AMT–one reason millions of upper middle-class Americans hate tax day.

The new AMT, called the Fair Share Tax, is anathema to tax reform (and I opined on that in today’s New York Times). It will be one more complication for people who are affected. For example, if you’re on the cusp of paying FST, you won’t know whether your capital gains will be taxes at 15 or 30 percent. And it will generate enormous marriage penalties.

And it’s unnecessary. If Congress is not willing to fix the underlying defects in the tax code, they don’t need a new AMT. One is really enough. If capital gains and dividends were fully taxed under the AMT, as they used to be before the Tax Reform Act of 1986, the Buffett Rule would be satisfied without a new levy. Moreover, I suspect that would raise enough more revenue that Congress could use the savings to finally index the thresholds for the AMT so that it doesn’t have to be patched every year.

Some people, however, see the Fair Share Tax as a good start on tax reform. The Times also has a nice article about two economic rock stars, Emanuel Saez and Thomas Picketty, who have been extremely effective at putting together data and analysis on rising economic inequality. The article is titled, “For Two Economists, the Buffett Rule Is Just a Start,” so the question is whether the Buffett Rule is a first step towards tax reform and a fairer, more progressive tax system, or a dead end.

The president has said that the Buffett Rule is not a specific proposal, but a principle for tax reform. The actual specific proposal, the Fair Share Tax, which the president supports, includes language saying that tax reform is the goal (thanks David desJardins for reminding me of this):

It is the sense of the Senate that–

(1) Congress should enact tax reform that repeals unfair and unnecessary tax loopholes and expenditures, simplifies the system for millions of taxpayers and businesses (including by eliminating the alternative minimum tax for middle-class Americans), and makes sure that the wealthiest taxpayers pay a fair share; and

(2) this Act is an interim step that can be done quickly and serve as a floor on taxes for the highest-income taxpayers, cut the deficit by billions of dollars a year, and help encourage more fundamental reform of the tax system.

The question is whether the Fair Share Tax is a complement to tax reform, or a substitute. The president has been talking about individual income tax reform for several years. The president commissioned Paul Volcker to put together a tax reform plan, which as far as I know never saw the light of day. [Janet Novack reminded me that the Volcker Commission did issue a report, but obviously it went nowhere.] The president said that his Bowles-Simpson commission, which would have simplified taxes (although not made them markedly more progressive), had a lot of good ideas, but none of those ideas actually made it into his budget. President Bush actually did commission a credible tax reform plan, but once completed, he acted like it was never his idea.

If the president and Congressional leaders really want tax reform, they should propose tax reform and throw their weight behind it. I understand this might not be a winning strategy in an election year, but we could lay the groundwork by putting together a serious proposal. President Reagan commissioned his Treasury to quietly put together a tax reform plan behind closed doors during the 1984 election year and then he pushed it to passage in 1986.

I don’t, however, think it’s in Democrats’ long-term interest to further undermine an already dysfunctional tax system. The Fair Share Tax might be good politics, but it’s bad policy.

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I invite you to consider comprehensive individual and business tax reform that redefines tax fairness and which can be described in one sentence. Tax individual and corporate income at a flat 8% rate (with no deductions, credits or loopholes), tax individual net wealth at 2% (excluding $15,000 cash and retirement funds) and impose a 4% Value Added Sales Tax (VAT) on business. The low 2-4-8 tax rates on individuals and business will produce about $500 billion more than current federal revenue and there will be no need for payroll, estate, and capital gains taxes or deferral of foreign income. If adopted, congress would be free to focus on better spending and a balanced budget. Eugene Patrick Devany, JD, MPA www.TaxNetWealth.com home of the 2-4-8 Tax Blend

While investors would LOVE your plan (0 capital gains…), I feel that anyone on a low income who has a decent net worth (like any senior) would HATE your plan and it would utterly screw them. It is simple for someone like an investor to hide their net wealth overseas or otherwise make it untaxable – there a literally dozens of corporate setups using foreign corporations and “sandwiches” of corporations to hide wealth and lower taxes… However, a senior who fully owns their property, pays no mortgage, has a tiny fixed income, and lives off their 401k, is going to have a FAR higher tax burden than they have now (since they currently only pay taxes on the interest their savings earns). Your tax plan gets rid of the incentive for people to build wealth to retire on and gives them an incentive to earn for longer while putting less away… Try to explain your plan to a senior with a net worth of over a million dollars who literally only makes a few hundred dollars a month… and explain to them why money earned through investment is different than money earned through REAL work…and therefore deserves to not be taxed…

Why aren’t you yelling how UnAmerican and stupid this is. Warren Buffett makes no sense he made all his money through questionable investments and now feels guilty. He could send a check to the IRS if he chose to, however he want the government to create legislation. I don’t understand this at all. The more money the people with money have, with the right corporate climate, the more they will invest. The EPA and the Tax code need serious revision. The Buffet Law sucks..

The TEA-GOP-Republican candidates generally agree on some of the biggest issues, especially the importance of lowering the national debt and overhauling entitlement programs such as Medicaid and Social Security at the expense of those most needy. The TEA-GOP-Republican candidates do not care about the poor, middle class, women, minorities or who they put at risk as long as they keep the rich from paying any more taxes. The TEA-GOP-Republican candidates want to protect Big Oil, Big Banks, Big Insurance, Wall Street and the most affluent Americans at the expense of the 99%. The TEA-GOP-Republican candidates do not care about America’s infrastructure, but would reduce the budget for the costs of major disasters. If you didn’t vote last cycle and are satisfied with the confrontational TEA parties control of Washington, stay home, don’t get involved and hide under the pillows. The real strength of politics is at the local level. That is where everyone needs to become involved. It is undeniably that investors get a break on dividends and other sources of income just because it is dividends and interest. Income is income, and the Congress’ have developed numerous taxes over the years to gain monies for the government. Having failed the general population in the past has not produced any thing except richer rich and stagnant middle class. There should be a leveling of the playing field and equal distribution of the tax pain across the entire population. Special status, deductions and exceptions have been given to the most affluent due to their monied abilities to buy political power in state houses and Washington. Lower taxes has never generated jobs in any economy anywhere in the world. Taxation and it’s effect has propelled separation of the classes into distinct segregation. Additionally, the Congress’ inability to generate budgets and stay within their budgets shows the unfair balances within Congress and their inability to perform their fiduciary functions. The big companies with money and power have bought influence and Congress people over the years, and have corrupted our economy. Percentages, exclusions, deductions and exceptions, along with top end limitations of taxes are a fallacy steeped with influence peddling and unfair balancing of responsibility on the backs of the masses over the elite few with influence. Responsibilities and pain should be spread about evenly and proportionally over the entire population. Further cuts in spending would be like turning off the engines on a prop plane once you’re flying!(para-phrasing Mr. Wrigley’s comments.)

That is absolutely ridiculous. You think that Republicans do not have families that are in need? You think that we do not care about our family members well being. The one thing we do realize is the corrupt nature of medicare, medicaid and other entitlement programs that are being abused. It needs to be adjusted. But to say we want to throw our Grandma under the bus is just nonsense and what most liberals love to rant about and use scare tactics. You have a backwards ideology that loves to mooch off hard working People while not contributing. The old woe is me cliche is getting old and it is destroying the future of our children.

We just need the FairTax.org A national sales tax that really is fair and equal for all. Why tax only the rich? Do we really need to send more people away from the US? The fair tax allows for prebates for the poor. It’s a national sales tax based on consumption of new products and services. Used items are not taxed. Keep your entire paycheck and stop worrying about April 15th forever. Lots of GOP people support it. HR 25..check the bill out and vote up if you think it’s a good idea.

Actually FairTax (which I STRONGLY agree with) DOESN’T tax the very poor at all (and actually GIVES money to the people who truly need it). You get a check in the mail every month (the “prebate”) for taxes you will pay up to the poverty line. What it does do is prevent people who game the system from doing that by not taxing their income (which they normally zero out) and taxing only their expenditures over the poverty line. It makes it fair for people who are single, like me, that pay almost 30% of their income to taxes (for me that was 20k this year) and get back a whopping 50$ tax refund. It isn’t just poor people who get the prebate – it is EVERYONE – so you don’t pay taxes on the necessities.

Why do most people focus on the tax rate? This is meaningless as no-one pays that rate. It is all based on how much you pay at the end of the year, less all those tax deductions created by Congress. Using a baseline of 1987 revenue collected by the Federal government in billions of dollars was 854.3 verses outlays of 1,004. Now looking at 2011 we find that revenue has increased to 2,303 verses outlays of 3,603. So, even as the tax rate dropped we have increased tax revenues over 200%! Source: Office of Management and Budget, Historical Tables, Table 1.3; http://www.whitehouse.gov/omb/budget/Historicals/ (last accessed April 13, 2012).

That’s complete BS. Maybe for a family of 4 with a house and kids in school – they certainly pay NOWHERE near the tax rate. However, I am single, few years out of school, currently rent and I am trying to save for a house and a decent car. While I make more than pretty much all my friends and more than the average family of four in my area, I am putting barely anything away in the bank, living in a cheap apartment, driving an 8 year old car, and I don’t even have real bills (scholarship for college) – yet I pay FAR more taxes than I put away. This year I paid over 20k in taxes and got back a HUGE 55$ tax refund. The government takes far too much out of my pocket…. How can anyone justify taking 30%+ from the money a college grad earns while they are paying back loans and trying to save for a house while someone like Mitt Romney pays a “hefty” 14%… My tax rate was LITERALLY double what he paid… Average tax rate for the top 400 americans? Just under 18%. Average tax rate for a professional college grad making 60-80k? right around 25%. How is that fair?